In re Global Service Group, LLC

• Decision Date: 04 November 2004
• Docket Number: Bankruptcy No. 01-15666(SMB).,Adversary No. 04-2775.
• Citation: 316 B.R. 451
• Parties: In re GLOBAL SERVICE GROUP LLC, Debtor. David R. Kittay, Chapter 7 Trustee of Global Service Group LLC, Plaintiff, v. Atlantic Bank of New York, et al., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

Page 451

316 B.R. 451

In re GLOBAL SERVICE GROUP LLC, Debtor David R. Kittay, Chapter 7 Trustee of Global Service Group LLC, Plaintiff, v. Atlantic Bank of New York, et al., Defendants.

Bankruptcy No. 01-15666(SMB).

Adversary No. 04-2775.

United States Bankruptcy Court, S.D. New York.

November 4, 2004.

COPYRIGHT MATERIAL OMITTED

Geron & Associates, P.C., Yann Geron, Esq., of Counsel, New York, NY, for Plaintiff.

Sullivan & Worcester LLP, Michael T. Sullivan, Esq., Gayle Ehrlich, Esq., Matthew B. Giger, Esq., of Counsel, New York, NY, for Defendant Atlantic Bank of New York.

Gazes & Associates LLP, Ian J. Gazes, Esq., Eric P. Wainer, Esq., of Counsel, New York, NY, for Alan Goldman, Gerald Goldman, Robert Cohen, A & G Goldman Partnership and Bargold Storage Systems LLC.

MEMORANDUM DECISION DISMISSING CLAIMS AGAINST ATLANTIC BANK AND INSIDER DEFENDANTS

STUART M. BERNSTEIN, Chief Judge.

On March 10, 2004, David S. Kittay, Esq., the chapter 7 trustee for the estate of Global Service Group, LLC ("Global" or the "debtor"), commenced this adversary proceeding against, inter alia, Atlantic Bank and members and insiders of Global, including Alan Goldman ("Alan"), Gerald Goldman ("Gerald," and together with Alan, the "Goldmans"), and Robert Cohen. Alan, Gerald and Cohen are sometimes collectively referred to as the ("Insiders Defendants"). The Complaint alleges two general categories of wrongful conduct: fraudulent transfers and the artificial prolongation of Global's corporate life, resulting in its "deepening insolvency."

Atlantic Bank moved to dismiss the five claims asserted against it and the Insider Defendants moved to dismiss many of the claims directed towards them. The Court disposed of most of the latter motion from the bench, and reserved decision on three claims. For the reasons that follow, Atlantic Bank's motion is granted. The three unresolved claims against the Insider Defendants' are also dismissed but with leave to replead.

BACKGROUND

The following facts alleged in the Complaint are assumed to be true for purposes of these motions.¹

A. Introduction

Global is a limited liability company organized under the laws of New York, and prior to the conversion of this case to chapter 7, was engaged in the business of marble, metal and wood refinishing. (Complaint, ¶¶ 8, 19.) The senior management and principal members of Global included the Goldmans and either Walter or Lauren Lichtman, who are also defendants.² (Complaint, ¶ 20.) Cohen served as the debtor's Chief Financial Officer, (Complaint, ¶ 21), and he and the Goldmans were authorized to sign checks on Global's behalf. (Complaint, ¶¶ 20, 21.)

The Complaint also names four defendant entities as fraudulent transferees. Two are owned and controlled by either or both of the Goldmans. These are A & G Goldman Partnership ("A & G"), (Complaint, ¶¶ 14, 121), and Bargold Storage System LLC ("Bargold"). (Complaint, ¶¶ 15, 161.) The other two are Andrew Bryant Associates ("Bryant"), a corporation, (Complaint, ¶ 16), and 95 Bruckner LLC ("Bruckner"), a limited liability company, (Complaint, ¶ 17), and "an insider of the Debtor as that term is defined under the Bankruptcy Code." (Complaint, ¶ 235.)

Finally, the Complaint names Atlantic Bank. Atlantic Bank is the senior secured creditor of Global, with an alleged lien on all of Global's assets. (Complaint, ¶ 22.)

B. The Trustee's Theories

1. Fraudulent Transfers

As noted, the Complaint alleges two general theories of wrongdoing. First, the Goldmans and Cohen authorized certain alleged fraudulent conveyances without requiring the transferees to pay fair and adequate consideration to the Debtor. (Complaint, ¶ 102.) The Complaint identifies the following fraudulent transfers:

a. Goldmans/A & G Transfers

On May 16, 2000, Global transferred $175,000 (or a total of $350,000.00) to each of the Goldmans within days after it obtained its initial loan from Atlantic Bank. (Complaint, ¶¶ 61, 82.) On December 21 and December 27, 2000, Global transferred $31,800.00 and $48,931.67, respectively, to A & G. (Complaint, ¶ 120.)

b. Bargold Transfers

During the two year period preceding the petition date, Global transferred not less than $65,000.00 to Bargold. (Complaint, ¶ 172.) Several of those transfers, aggregating $45,000.00, were made within one year of the petition date. (Complaint, ¶ 160.) In addition, Global transferred not less than $76,424.43 to Bargold after the petition date. (Complaint, ¶ 199.)

c. Bryant Transfers

Bryant shares the same address as Andrew Kalish, one of the debtor's former employees. (Complaint, ¶ 205.) During the two years preceding the filing of its chapter 11 petition, Global transferred at least $116,602.86 to Bryant. (Complaint, ¶ 216.) Of that amount, $36,000.00 was transferred within one year of the petition date. (Complaint, ¶ 204.)

d. Bruckner Transfers

Within one year of the petition date, Global transferred not less than $51,045.84 to Bruckner (Complaint, ¶ 234.) Following the commencement of the case, the debtor transferred not less than $22,015.28 to Bruckner. (Complaint, ¶ 241.)

e. Lauren Lichtman Transfers.

During the two years preceding the petition date, Global transferred at least $27,022.78 to Lauren Lichtman. (Complaint, ¶ 259.) Not less than $14,022.78 of that amount was transferred during the one year period before the petition date. (Complaint ¶ 246.)

2. "Deepening Insolvency"

The trustee's second theory maintains that Global was allowed to operate while insolvent, and incurred additional debt that it could not repay. The following claims are based on this theory:

a. Atlantic Bank

Since its formation in January 2000, Global was insolvent or in the vicinity of insolvency and undercapitalized. (Complaint, ¶ 31.) Atlantic Bank knew or should have known that the debtor would be unable to repay its loans due to its financial condition, but loaned the debtor money anyway, (Complaint, ¶ 32, 33), apparently based upon its relationship with the Goldmans and the strength of their personal assets. (Complaint, ¶ 33.) The Goldmans pledged their individual assets to Atlantic Bank in order for Global to obtain the necessary loans for working capital and to continue operating. (Complaint, ¶ 51.)

Other creditors extended credit to Global based on Atlantic Bank's willingness to extend credit. (Complaint, ¶ 34.) The Atlantic Bank loans allowed Global to prolong its corporate existence and incur increased debt which would have been avoided without the Atlantic Bank loans. (Complaint, ¶ 35.)

b. The Insider Defendants³

The Goldmans and Cohen, either individually or acting in concert with each other, allowed Global to do business and incur indebtedness while it was insolvent and undercapitalized. (Complaint, ¶ 101.) The Insider Defendants knew that the debtor would be unable to repay these debts based on its financial condition. (Complaint, ¶ 109.) By prolonging the debtor's corporate life and incurring more debt, the Insider Defendants deepened Global's insolvency, and reduced any potential recovery for the creditors of the debtor's bankruptcy estate. (Complaint, ¶ 105.) The expansion of Global's debt was the proximate cause of the damage to Global and its creditors. (Complaint, ¶ 106.)

C. The Bankruptcy Filing

The debtor filed its chapter 11 petition on November 7, 2001. (Complaint, ¶ 1.) The case was converted to chapter 7 by order dated March 11, 2003. (Complaint, ¶ 1.) David Kittay, Esq. was appointed interim chapter 7 trustee, and subsequently qualified as permanent trustee. (Complaint, ¶ 1.) The trustee filed his forty-seven count Complaint, commencing this adversary proceeding, on March 10, 2004. Atlantic Bank moved to dismiss the First through Fourth and Seventeenth Causes of Action, all of the claims in which it was named. I reserved decision, and these causes of action are discussed below.

The Insider Defendants, A & G and Bargold, represented by the same law firm, moved to dismiss many of the Causes of Action.⁴ Following the oral argument of the motion on July 27, 2004, the Court denied the motion to the extent that it was directed at the fraudulent conveyance claims, dismissed the contribution claim, and the trustee withdrew the equitable subordination claim. The Court reserved decision on the claims that implicated the "deepening insolvency" theory, (the Thirteenth through Fifteenth Causes of Action), and these are discussed below.

DISCUSSION

A. Atlantic Bank's Motion to Dismiss

1. The First Cause of Action/"Deepening Insolvency"

The First Cause of Action alleges that Atlantic Bank engaged in conduct associated with the phrase "deepening insolvency." "Deepening insolvency" refers to the "fraudulent prolongation of a corporation's life beyond insolvency," resulting in damage to the corporation caused by increased debt. Schacht v. Brown, 711 F.2d 1343, 1350 (7th Cir.), cert denied, 464 U.S. 1002, 104 S.Ct. 508, 78 L.Ed.2d 698 (1983). Its origin has been traced to Bloor v. Dansker (In re Investors Funding Corp. of New York Sec. Litig.), 523 F.Supp. 533 (S.D.N.Y.1980). See Mette H. Kurth, The Search for Accountability: The Emergence of "Deepening Insolvency" as an Independent Cause of Action, 9 ANDREW'S BANKR.LITIG. REP. 6 (Aug. 27, 2004). There, the complaint alleged that the debtor's insiders (the Danskers) embarked on a scheme to loot the corporate debtor. In re Investors Funding Corp., 523 F.Supp. at 536. Relying on a false picture of the debtor's financial well-being, they induced creditors and shareholders to invest more funds in the company. Thereafter, they misappropriated a portion of the funds that were raised. See id. at 536.

Peat, Marwick, Mitchell & Co. ("PMM") had served as the debtor's outside auditor. The debtor's chapter X trustee sued PMM, charging that the Danskers used the false financial statements that PMM had certified to further their scheme. Id. at 537. PMM moved for partial judgment on the pleadings or for partial summary...